The tax bill that went into effect in 2018 — officially known as the Tax Cuts and Jobs Act (TCJA) — significantly altered the existing 1986 tax code. While the TCJA’s most significant impact was on businesses and corporations, it also changed individual tax filing, including rules on deductions for charitable giving.
As we complete the second tax season under the revised code, what impact has the TCJA had on charitable giving? What should you know to maximize your philanthropy and give more of your money to the organizations you support and less of it to the IRS, helping yourself do well by doing good?
To answer that question, we first need to understand how the TCJA changed what you’re allowed to deduct.
The revised deduction guidelines
The biggest change for individuals under the new code is an increase in the standard deduction, as follows, which is adjusted annually for inflation:
- For individual filers — from $6,500 to $12,000
- For joint filers — from $13,000 to $24,000
- For heads of households — from $9,550 to $18,000.
Other changes include a cap on mortgage interest deductions on the first $750,000 of debt (previously $1 million), a $10,000 cap on deductions for state and local taxes, and the total elimination of deductions for casualty or theft losses.
With the standard deduction almost doubling, fewer filers benefit from itemizing deductions. As a result, nonprofit organizations feared that giving would decline, as the ability to lower your tax bill with deductible charitable donations would remove the incentive for some people to give.
As reported by Giving USA, those fears were well-founded, at least to some extent. Individual giving declined by one percent in the first year of the new code (3.4 percent when adjusted for inflation), and individual giving as a percentage of total giving dropped from 70% in 2017 to 68% in 2018.
But the decrease in giving was not as severe as many had predicted, particularly when you consider that other factors influence the extent of giving in any given year — the considerable market volatility in 2018 likely played a role as well. Some changes in the code actually encouraged philanthropy, including an increase in charitable deductions from 50% to 60% of adjusted gross income for those who itemized deductions.
While that’s good news for those who can afford that level of philanthropy, what other strategies can you employ to maximize your giving under the new code?
Four strategies to maximize giving
1. Bunching. This refers to the practice of including as many deductions in one year as possible. For charitable giving, that means you would give two or three years’ worth of donations in one year to maximize your ability to exceed the standard deduction amount. This strategy works well if you have the available reserves to make that commitment. It can also help individuals or couples filing jointly whose income for one year has spiked. You can minimize your tax bill in one year and take the standard deduction in the next.
2. Donor-advised funds. These funds enable you to make a substantial contribution in one year, deduct that contribution, and disperse the funds in subsequent years. This is a good choice for philanthropists who want to maximize their contributions and minimize their tax bill but haven’t determined where they want to direct their giving.
3. Qualified charitable distribution. Those who are 70½ years old or older and are taking required withdrawals from an individual retirement account can allocate those funds directly to a charity. This doesn’t lower your tax exposure, but it does avoid income tax on the withdrawals. This option is not available for 401(k) plans or Roth IRAs.
4. Donate stock. If you have an investment portfolio that’s appreciated, consider making a stock gift of your “winners.” Again, this is more about tax avoidance — in this case, taxes on capital gains.
To conclude, if you were already philanthropically inclined, the revised tax code shouldn’t get in the way of your charitable giving. If you’re beginning your donor journey, learn how you can maximize your ability to support the causes you believe in.
Consider working with a financial advisor who has expertise and experience in philanthropy.
And by all means, keep up the good work of charitable giving.
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